Congress has passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which principally addresses financial regulatory measures.  The legislation also includes a number of securities law related provisions.  For example, Section 503 requires that the SEC review the findings and recommendations of the annual SEC Government-Business Forum on capital formation and address the findings and recommendations publicly.  Section 504 expands the Section 3(c)(1) exception under the Investment Company Act to include venture capital funds that have up to 250 investors and $10 million in aggregate committed capital contributions and uncalled capital.  Section 507 raises the Section 701 threshold to $10 million and indexes the threshold to inflation going forward.  Section 508 allows reporting companies to rely on Regulation A.  Rule 509  provides closed-end funds listed on a national securities exchange and certain interval funds to benefit from the same securities offering and other provisions available to operating companies.  After the Small Business Credit Availability Act was passed modernizing the securities offering and communications related provisions for BDCs, there had been concern that closed-end funds had been forgotten.

See the firm’s Legal Update here.


In recent remarks, Commissioner Peirce commented on capital formation, repeating some statistics about the decline in the number of IPOs in recent years and the relatively small number of public companies (about 4,500).  She noted that many companies are able to raise capital in private placements or exempt offerings; however, fewer investors are able to share in the growth of such companies that stay private.  She noted a few regulatory impediments that may make becoming a public company less compelling.  Among these impediments, Commissioner Peirce included the Sarbanes-Oxley Section 404(b) attestation requirement and the burden it places, especially on pre-revenue companies, Dodd-Frank Act-mandated disclosure requirements, such as those on conflict minerals, Dodd-Frank Act executive compensation requirements like the pay ratio rule, and the lack of regulation of proxy advisory firms.  The Commissioner also commented on Regulation A, noting that as of the end of 2017, 185 Regulation A offerings had raised approximately $670 million in offering proceeds, and noting that the current offering threshold for Regulation A offerings may still be too low to be a meaningful stepping stone to an IPO.  The Commissioner also raised a suggestion that has been raised by Commissioner Piwowar from time to time; that is, abandoning the accredited investor standard and allowing all investors to participate in exempt offerings.  The full text of the remarks are available here.

Today, Bill Hinman, Director of the Commission’s Division of Corporation Finance testified to the House Financial Services Subcommmittee.  Mr. Hinman provided an overview of the Division’s ongoing projects and its priorities.  He noted that the Commission remains focused on capital formation related initiatives designed to promote interest in having more companies undertake IPOs.   In this regard, for the first time, he mentioned that the Division is considering rules extending the ability to test-the-waters to non-emerging growth companies.  Extending the test-the-waters provisions to non-EGCs has been a measure that has been included in various proposed bills that have garnered strong bipartisan support on the House side.

Mr. Hinman also reported on measures affecting smaller companies. Mr. Hinman provided market updates on Regulation A offerings (since the amendments in 2015, 78 issuers have raised approximately $670 million in 185 offerings) and Rule 506(c) (noting $147 billion has been raised in reliance on generally solicited offerings under Rule 506).  Mr. Hinman indicated that the Staff would be conducting retrospective reviews of these new exemptions.  Mr. Hinman noted that the Division is considering recommendations that would expand the accredited investor definition.  This is interesting given that amendments to the definition had not appeared as a high priority in the Commission’s regulatory agenda.  He also signaled that the Division is considering harmonizing or rationalizing the exempt offering rules, which had been suggested by practitioners for some time now.

Addressing upcoming priorities, Mr. Hinman again mentioned the proposed changes to the smaller reporting company definition, the disclosure effectiveness initiative, the resource extraction payments rule, and possible revisions to the conflict minerals rule.  The written testimony is available here.

Chair Clayton focused his testimony on the Commission’s plans with respect to the fiscal year 2019 budget requests, and provided some commentary regarding the best interests rule proposal.  The written testimony is available here.

May 21 – 22, 2018

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

Join PLI’s expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will begin by addressing the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. Speakers will also address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. Panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will also address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital-raising alternatives.

Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on day one of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on day two. Partner Michael Hermsen will speak on the “Regulation A Offerings” panel on day one.

To register for this conference, or for more information, please click here.

The final report from the Forum session held last fall in Austin, Texas was recently published.  The recommendations were consistent with those of prior such gatherings. We summarize the principal recommendations.  First, the Forum recommends amendment of the accredited investor definition in order to expand the categories of qualification to include, regardless of net worth or net income, certain persons holding FINRA licenses or CPA or CFA designations, knowledgeable employees, and persons that have passed a sophistication test.  Second, the Forum recommends amendments to Regulation A to mandate blue sky preemption for secondary trading of Regulation A Tier 2 securities, allow at-the-market offerings, allow reporting companies to use Regulation A, increase the offering threshold to $75 million, and require portals conducting Regulation A offerings to be registered.  Third, the Forum notes that the SEC ought to lead a joint effort with FINRA to provide clear guidance to participants in Regulation Crowdfunding offerings.  Fourth, the Forum recommends various changes to Regulation Crowdfunding, including, among other things, raising the investor’s investment limitations and to increase the offering limit.  Fifth, the Forum recommends exempting small or intermittent finders from broker-dealer registration requirements.

In March, the House approved by roll call vote (246 to 170) the Regulation A+ Improvement Act of 2017, H.R. 4263, which would amend Tier 2 of Regulation A to raise the offering threshold from $50 million to $75 million, subject to inflationary adjustments every two years by the Securities and Exchange Commission.

The Senate bill (S. 2155) titled the Economic Growth, Regulatory Relief, and Consumer Protection Act, which focuses principally on scaling back various Dodd-Frank Act bank regulatory provisions, also contains a number of securities law-related measures.  The securities law measures that found their way into the Senate bill by way of an amendment reflect the text from various bills that had been introduced in, and passed by, the House on a standalone basis.  These include the following:

  • Section 501 that would amend the Securities Act in order to apply the exemption from state regulation of a securities offering to securities listed on any national securities exchange, effectively broadening the definition of a “covered security;”
  • Section 503 that would require the Securities and Exchange Commission (the SEC) to review the recommendations of the annual SEC Government-Business Forum on Capital Formation and disclose any action taken in light of such recommendations;
  • Section 504 that would amend Section 3(c)(1) of the Investment Company Act in order to permit “qualifying venture capital funds” to be exempt from the Investment Company Act if they have no more than 250 beneficial owners (an increase from the current 100 beneficial owner threshold) and aggregate committed capital not exceeding $10 million;
  • Section 507 that would direct the SEC to amend Rule 701 in order to increase from $5 million to $10 million (subject to inflationary adjustments) the aggregate sales price or amount of securities sold during any 12-month period in excess of which the issuer is required to deliver additional disclosure to employees;
  • Section 508 that would direct the SEC to amend Regulation A in order to make it available to Exchange Act reporting companies; and
  • Rule 509 that would allow closed end funds to rely on the securities offering and proxy rules available to operating companies and bring them to parity with operating companies and also now with business development companies, or BDCs, which were the beneficiaries of provisions incorporated into the recently enacted spending bill.

In a letter to Congress, Commissioners Piwowar and Peirce essentially dissented from the views expressed by the Securities and Exchange Commission (the SEC) regarding the offering threshold for Regulation A offerings.  The SEC wrote to Congress noting that it did not at this time intend to raise the Tier 2 Regulation A threshold of $50 million.  Commissioners Piwowar and Peirce expressed the view that there should be further consideration of the benefits to be gained by raising the offering threshold at the very least through a comment period.  Their letter to Congress notes that the Treasury Report on capital markets included a recommendation to raise the Regulation A threshold to $75 million.  The Commissioners’ letter also cites the passage by the House of the Regulation A+ Improvement Act that also included a provision raising the dollar threshold.  The next opportunity for the SEC to consider the threshold would arise in the ordinary course in 2020.